Stock Market & Crypto Currency Update – January 2nd, 2024
Bottom Line: My first rule of money is to never let your money and emotions cross paths. The purpose of this story is to inform you as to what's possible in a near worst-case outcome for the financial markets. The reason is to understand what's possible, though unlikely, so you can plan soundly for your financial future unemotionally. The US stock market is the greatest wealth creation machine in the history of the world. Likewise, cryptos have created generational wealth for many who were early, however most investors in the crypto space have now lost money on their original investments. I want you to benefit from investing without making emotional mistakes with money. Historically, when investors attempt to time the market, they end up worse off than if they’d stayed with their original plan over 90% of the time. This is all about combating those types of mistakes.
Here's how far the DOW, S&P 500 & Nasdaq performed in 2023:
- DOW: +14%
- S&P 500: +24%
- Nasdaq: +43%
Needless to say, it was a terrific year for stocks which is only made somewhat more remarkable against the backdrop of March’s banking crisis, rising geopolitical instability around the world including the ongoing Russia-Ukraine war and the Israel-Hamas war and continued affordability challenges for most Americans culminating in record debt for the average household. This goes to show how hard it is to predict the short-term movements of stocks and the market and why it's important to have an intentional, principled, investment plan. The bottom line is that the average historic rate of return for the S&P 500 is just over 10%, which exceeds any investment class historically. A focus on long-term principled investing has always worked for those who’ve done so. So, with an incredible year of stock market gains behind us, what should we consider as we wade into the new year?
The biggest news out there remains the Federal Reserve’s interest rate policy. The market wrapped up its longest winning streak to end the year, 9 nine weeks, to reach new record highs in the process, due to the Fed’s signaling to the market that interest rate increases are over (and also a belief by some that interest rate cuts could be in the cards before long – though that’s highly speculative at this point). But the momentum that lifted stocks towards record highs to end the year was about more than just interest rates. There’s been an increasing bet by economists that we’ll have a “soft landing” in the economy, meaning that we’d be able to exit the period of extraordinarily high inflation without experiencing a recession in the process. As recently as the start of the fourth quarter about two-thirds of economists expected the US would enter a recession in 2024. The current consensus forecast is for slow growth but no recession this year. Aside from unforeseen events that could impact the economy, that’s the single biggest determining factor regarding how much risk is priced into the market right now. If there is in fact a soft landing this year and we manage to avoid recession, any downside in the markets is likely to be mitigated. On the other hand, given the current lofty valuations of stocks, if the economy were to slip into recession after all – there's meaningful room for short-term downside in the market. As for cryptos...
Bitcoin & co. aren’t enjoying new highs as stocks broadly are (bitcoin for example is still trading well over $20,000 lower than its 2021 highs)., however 2023 was still a terrific rebound year for the space with Bitcoin posting gains of 250% for the year with similar returns for other tokens. Against the backdrop of the FTX and Binance scandals and collapses, 2023 was considered by some to be a make it or break it kind of year for the space. That cryptos preserved, there’s a general belief in the industry that they’re here as an alternative investment to stay...especially as the regulatory environment in the US has considerably improved.
Bitcoin enters the year trading at $42,600 placing it near levels reached in April of 2022. Likewise, Ethereum at $2,300 keeps the token close to April 2022 levels. Meanwhile, the BitwiseETF, which represents the top 10 cryptocurrencies is priced near levels last seen two springs ago. A key factor during the digital currency rally has been the amount of publicly available bitcoin is at the lowest level since 2018 creating a supply/demand imbalance which is helping push prices higher. Questions remain about the regulatory environment – but the cloud over the sector from that perspective seems to be lifting a bit. I can’t provide value analysis for cryptos currencies because they retain no inherent value, but I can for stocks because they do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 26.35
- S&P 500 avg. PE: 16.03
The downside risk is 39% based on earnings multiples right now from current levels. That’s the most risk that’s been priced into the market since June of 2021 when the impact of rising inflation was first being felt. It’s 19% less risk than the highs reached during the peak of the pandemic bubble. If a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If that is a problem for you, you should probably seek professional assistance in crafting your plan that balances your short-term needs with longer term objectives.